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Financial transactions originally began with barter / trade: commodity traded for a different commodity, commodity traded for a manufactured product, and commodity / product traded for a service. The problem with barter is in attempting to accurately measure and equate 2 separate and distinct commodities for exchange, and that agricultural commodities deteriorate over time and distance, thus it is difficult to barter today for a service in the future.
Many commodities, materials and items have been assigned value by different societies that could be used in trade or barter. Metals, plant seeds, carvings, sea shells, textiles and fabrics, beads, manufactured goods, and really anything that was considered scarce and / or collectively deemed to have value by a society. The problem with this situation is that an item may have absolutely no intrinsic value to another entirely separate, distinct and geographically distanced society / culture.
The only commodities that appear to have had an intrinsic value of their own that transcended cultures and societies as a medium of trade exchange are gold and silver. Predetermined weights, of a certain level of refined purity and official stamping for identification of authority and source were the beginning of coinage. The use of coinage meant that at least a single belief and confidence in a material item could universally be exchanged for a multitude of commodities, products and services. In addition, due to the duarability of the item the same coinage could be used repeatedly for entirely separate and unrelated exchanges.
However, the scarcity of gold and silver resulted in an inadequate supply available for transactions, which in turn meant an inflated value of the coinage that made it unsuitable for low value transactions. Thus, coinage (and wealth) were concentrated under the control of governments and merchant classes. Due to the scarcity of the coinage and its high intrinsic value it was not convenient nor safe to actually transport the coinage itself and it was a situation to be avoided. Merchants recognized that there was an amount of wealth of coinage located at trade destinations, stored under secure conditions. Two parties who trusted eachother could easily credit the other party with an amount of coinage that could be physically transported at a later date if required.
In order to credit another party or request a physical disbursal or shipment of coinage the hand written money order was developed. This represents the development of the collective confidence in a piece of paper, with no intrinsic value as a material item itself, inscribed with symbols and signatures of authority and denomination that could be exchanged for coinage with an intrinsic value. The convenience and low expense to transport, and ability to conceal, a written order led to its widespread adoption by merchant houses with adequate supplies of coinage. An order or promise to pay an amount of coinage issued by a reputable merchant to another merchant could then be assigned to another unrelated party as a form of payment for goods and services. This represents the development of a circulating, bearer money order. The removal in the written order of a specific party to be paid and replaced by a general order or promise to pay a specific amount to the bearer of the note represents the development of a circulating paper currency. The relationship between this initial paper currency and gold was referred to as the "gold standard", indicating that the currency was backed by gold deposits in a bank and redeemable for a fixed amount of physical gold.
All humans at the very least require water, food, clothing and shelter and any currency throughout the history of mankind must have been able to be exchanged for those basic requirements in order to be successful. Paper currency, again paper itself having no intrinsic value, costing only cents to produce and being quite susceptible to damage from fire or water, only succeeds with the confidence of all those willing to accept it as a form of value itself that can be exchanged for at least the basic life giving requirements. However, modern paper currency is no longer exchangeable for gold or silver, the 2 universally exchangeable commodities that could further be used to purchase the basic necessities of life. Yet, paper currency is still readily accepted universally. Thus, the key to the success of a "currency" is availability, familiarity and confidence that it will be accpeted at an acknowledged value that will not rapidly deteriorate over time. Since the removal of cash being backed-up by gold (gold standard), cash is referred to "fiat money" meaning the government orders the creation of money (printing of new notes) and its value is based only the public statements, determination and the ability of the nation to defend its value. Unfortunately, there are many challenges to maintaining the value of and confidence in a currency: war, inflation, economic catastrophe, political change, criminal activity such as counterfeiting and technological advancement.
It now requires high-tech advances in the design and manufacture of a currency in order to curtail counterfeiting. For instance, the continued introduction of security features in the new United States $20 bill now includes background colors, color shifting ink, introduction of 2 new eagle graphics, embedded security strip, watermarks, and a revision of the off-center portrait of Andrew Jackson on the bill. In order to smooth the transition to and adoption of the new bill the U.S. Treasury paid for a multimillion dollar advertising / education campaign describing the bill in both print and television media, worked wih manufacturers of ATMs, currency counting machines, vending machines and automated payment machines so that the bill would be accepted. The result was that an entirely redesigned bill was introduced into circulation without any loss of confidence by the public. The two previous versions of the bill also continue to be accepted at face value. The $20 bill is the largest bill used by U.S. citizens in day-to-day transactions, while foreigners are comfortable using $100 and $50 bills while traveling within the United States, and counterfeiters do not usually attempt to duplicate $5 and $10 bills. The United States Secret Service is the agency authorized to investigate U.S. currency counterfeiting (Title 18 US Code, Section 3056).
There is, presently, more U.S. currency in circulation worldwide than any other national currency. In fact, the Federal Reserve System estimates that up to two-thirds of the approximately $650 billion in U.S. currency in circulation is held outside the United States. There are 3 types or classes of U.S. paper currency in use today. The most numerous (99%) in circulation are Federal Reserve Notes. The remainder are United States Notes and Silver Certificates, which are occasionally seen in circulation but are no longer produced, thus have a higher "collector" value than face vale.
All currency in circulation is routinely deposited to Federal Reserve Banks by commercial banks. The Federal Reserve, as do a number of other central banks, employs the Giesecke & Devrient BPS 3000 banknote / currency counter (detects the authenticity and value of the banknote, count, sort, band, and bundle the banknotes). Worn notes are systematically destroyed by Federal Reserve Banks during ordinary currency processing (Giesecke & Devrient BDS 400 currency shredder). The destroyed notes are replaced by new currency provided by the Bureau of Engraving and Printing. The note most frequently replaced is the $1 denomination. There are over four billion $1 bills in circulation, and the life expectancy of each is approximately 18 months. Since larger denominations are handled less, they last longer.
When a note is partially destroyed, the Treasury Department will replace it if clearly more than half of the original remains. Fragments of mutilated currency which are not clearly more than one half of the original whole note may be exchanged only if the Director of the Bureau of Engraving and Printing is satisfied by the evidence presented that the missing portions have been totally destroyed. Fragments may be sent by registered mail to the Department of the Treasury, Bureau of Engraving and Printing, OCS/BEPA, P.O. Box 37048, Washington, D.C. 20013.
The Central Bank Counterfeit Deterrence Group (CBCDG) is a group of 28 central banks and note printing authorities organized at the request of the Governors of the G10 central banks. Its mission is to investigate the common emerging threats to the security of banknotes, and to propose solutions for implementation by issuing authorities. www.rulesforuse.org/
Latest figures on Euro banknotes and coins in circulation.
www.ecb.europa.eu/stats/euro/circulation/html/index.en.html
Images of Euro banknotes and coins. http://www.ecb.europa.eu/euro/html/hires.en.html
One further step removed from the exchange of a paper currency is the exchange of paper checks. In some way the usage of paper checks is almost a step backward to the usage of a written money order. However, with the ready acceptance of anonymous paper currency, it itself became inconvineint to transport or mail, especially for large transactions. Thus, the paper check represents a corporate or individual promise (under penalty of law) to pay the inscribed amount to the bearer with cash already held on deposit at a bank. However, due to technologial development of computer database management and a well developed clearing and settlement system there is no actual, or very little, movement of cash. Rather there is a series of accounting debit and credit entries. The usage of paper checks represents a shift in confidence from an actual currency toward the confidence in an actual payment system that has set procedures, a level of predictability and the ability to rapidly identify, locate and prosecute abusers of the system and even provide some safeguard against criminal usage of the payment system.
In the United States, every institution that opens and maintains a checking account for an individual or corporate customer has a 9-digit ABA (American Bankers Association) routing number that identifies the institution. The ABA routing number is ncessary for the check to be processed through a payments system. The special ink encoding at the bottom of the check also includes the Account number and the check number. ABA routing numbers are also used in electronic funds transfers.
As of October 28, 2004, the Check 21 Act (Check Clearing for the 21st Century) in the United States now allows banks to process checks in an "electronic" manner, which essentially means that a receiving bank will scan a paper check to create a new negotiable instrument digital image and then process the check by using the image and voiding / shredding that physical paper check rather than send it to the bank of origin. This program will save substantial transporation fees of physically routing the checks around the nation. For consumers this means that the processing is now much faster (actually hours as opposed to days) and that sufficient funds must be in the account at the time the check is issued (loss of the "float", the length of time it took for the receiver of the check to actually be paid). These paper check digital images are known as "substitute checks" and these substitute images will be printed out by the original bank as a form of record to the account holder rather than return the physical check (approximately 35% of the U.S. checking account holders still receive an actual paper check). Already, stores and services have scanners that scan an issuer's check and immediately returns the paper check right back to the issuer as they are standing there. In the past several years, checks (and cash) have seen less usage at point of purchase as credit cards and debit cards have increased. Similarly, the Federal Reserve has experienced a lower volume of check processing in the past year. [The decision to move quickly to the electronic substitute was in response to the grounding of airline traffic in the wake of the 9/11 terrorism act that precluded the ability of paper checks to be transported nationwide for several days].
| Payment Card and Smart Card Systems |
The discussion below covers the operational side of the credit card industry. To see the consumer side of credit card issuance and usage please see the Consumer Banking Products Page. To see issues related to the securitization of credit card receivables please see the Asset-backed Securities Page.
Standing developmentally somewhere between currencies and checks and the full development of digital currecy is the credit card. The credit card is only able to have been developed and utilized due to improved telecommunications capabilities, improved computer database management and clearing and payment systems, and it has become one of the most widely accepted forms of payment.
Credit cards (as are debit and prepaid cards) are physically a standard 3 3/8" by 2 1/8" plasic card with either a magnetic strip and/or computer chip.
At the point of sale, a credit card purchase represents a cashless transaction, which is a continuation of the confidence building in the ability of the ACH (Automated Clearing House) payment system network. However, the credit card itself has only a magnetic strip with the account number encoded on the strip which is read by the magnetic strip reader attached to a cash register. The reader automatically commences the telephonic connection to the database repository of the issuer to verify the authenticity of the card and available credit balance of the cardholder. The approval of the sale is completed over the telecommunications link not through the card itself. The structure of credit card usage still requires the user to mail a separate monthly payment to the financial institution that issued the credit card and paid the retailer, which is to be applied to the outstanding balance of the respective cardholder's credit charges. Although there is widespread abuse of credit cards there are still quite a bit of safeguard and recourse built into the system.
The success of a credit card is dependent upon its combined acceptance from consumers, merchants and issuers (usually banks, credit unions, etc.).
In the United States, the largest credit card associations are Visa (over 50% share of consumer credit card spending in 2003), MasterCard (approximately 30% market share of consumer credit card spending), American Express, Discover (owned by Morgan Stanley) and Diners Club. The level of cards issued and payments processed is dominated by Visa and MasterCard, which are both truly an international payments network. Banks purchase memberships in the association in return for the ability to offer bank card products and services. The associations require members to conform to their operating policies and procedures to ensure the integrity of the system. In addition to charging processing fees, both place restrictions upon co-branding banks and merchants from either issuing or accepting competitor's credit cards. The situation became bad enough that Wal-Mart, the largest retailer in the United States, ceased accepting non-cobranded MasterCard debit cards for purchase transactions. In October 2004, the United States Supreme Court ruled on an anti-trust decision from a lower court that indicated that Visa and MasterCard could no longer prohibit member financial institutions from offering the cards of other issuers (American Express, Discover).
Affinity and cobranded cards are partnerships with non-bank businesses, associations, and notfor-profit groups that market
credit cards with their name and/or logo on the card. The cards are issued as a
MasterCard or Visa and can be used for purchases anywhere Visa or MasterCard is accepted as well as for
purchase of a partner’s products or services.
The corporate credit card is another type of general purpose card. The bank issues corporate cards to selected employees of the sponsoring company. Generally, employees use the cards for travel and entertainment expenses incurred on behalf of the company. The terms of the contract between the bank and sponsoring company dictate whether the company will guarantee employees’ credit card loans. Corporate cards are generally less profitable to banks than consumer credit cards because they do not routinely incur finance charges. Rather, annual fees, interchange income, and other service fees are the primary sources of income. The credit risk is increased because there may be several or dozens of individual users on the corporate account but the company is the single source of repayment.
Secured credit cards are general purpose credit cards targeted to customers with poor or limited credit histories who do not qualify for a traditional, unsecured credit card loan. The credit card is usually collateralized by a cash deposit, generally a restricted access savings account or certificate of deposit. Depending upon the bank’s policy, the credit limit is set at 50% to 100% of the deposit amount. Secondly, if the collateral savings account is not restricted or closely monitored then the issuing bank does have the possibility of incurring a credit loss in the event of non-payment and there is insufficient funds in the collateral account.
Private label cards are issued under a contractual agreement between a bank and a retailer, such as a department store, or another commercial firm, such as an oil company. Private label cards typically differ from general purpose cards because they limit where the card is accepted and they generally have lower credit limits. A private label card is attractive to retailers because it promotes sales and customer loyalty. The issuing bank may be able to enter into an agreement with the partner such that the partner will guarantee all or a portion of unpaid charges, which substantially reduces the risk for the issuing bank. Some private label cards are also now issued either under VISA or MasterCard, which means they can also be used outside of the retailer's store network and anywhere that VISA or MasterCard is accepted (dual-line consumer credit card).
Visa's transaction processing system is named VisaNet. The update of the system was Base1 (Base One). The Base1 system will allow for the consolidation of both credit and debit card transaction messages over a single system. While VisaNet is presently an authorizing and settlement system between banks, Base1 incorporates a Web services capability to report greater detail abount the actual purchase. In order for merchants to offer visa to their customers they must apply to and be accepted by a Merchant Acquirer who maintains the direct relationship with the merchant. Examples of Acquirers who provide VISA acceptance services are BA Merchant Services, BB&T Merchant Services, Capital One Merchant Services, Chase Paymentech Solutions, Citi Merchant Services, Concord EFS/EFS National Bank, several dozen banks and third-party acquirers.
The greatest challenge to MasterCard and Visa's position is from First Data Corp., who is the operator of an ACH (credit card transactions) who operated Chase Paymentech and acquired Concord EFS, Inc. (Concord also operates the widespread Star network, which processes bank ATM and PIN-based debit card transactions). Another large credit and debit card processing system operator is Heartland Payment Systems, which also processes Visa, MasterCard, American Express, Diners Club, Discover and JCB transactions. Heartland also operates a payroll service division and the Campus OneCard system that serves as a multi-functional campus ID card as well as a prepaid card for on-campus purchases (bookstore, laundry, vending machines). Another credit and debit card processing company is RBS Worldpay (a subsidiary of the Royal Bank of Scotland), which also processes Visa, MasterCard, American Express, Discover, and which serves the retail industry through integration with application systems Retail Pro, Galaxy, Counterpoint and Sellmate Store Management, the petroleum industry through integration with application systems VeriFone, Gilbarco, Retalix and AutoGas, and the restuarant industry through integration with application systems Radiant Systems’ Aloha and Squirrel Restaurant Systems.
In January 2005, Discover Card (Morgan Stanley) and Wal-Mart indicated that they would offer a credit card to Wal-Mart customers (Wal-Mart is the largest retailer in the world). GE Consumer Finance will issue the private-label card on the behalf of both parties and the card will be branded Wal-Mart Discover. The card can also be utilized for other transactions outside in-store Wal-Mart purchases. Discover Financial Service also operates a credit card business in the United Kingdom known as Goldfish (Goldfish Card Services Limited).
Visa payWave, MasterCard PayPass and American ExpressPay all offer a card that does not need to be swiped and that support the same standard for Radio Frequency (RF) cards—ISO 14443 A/B. Peripheral Contactless Readers (PCRs) plug into existing conventional POS terminals. These payments are processed similarly to traditional VISA / MasterCard payments. All cards with Visa payWave also have the standard magnetic stripe, so they also work with traditional card readers.
The rapid growth of credit cards also has caused banks to look elsewhere for funding rather than from traditional deposit accounts. The credit card operations / subsidary of a bank can be funded by its retail parent’s commercial paper program. However, some operations are self-funding through the growth and widespread practice of securitizing credit card receivables. Please see the Asset Securitization page.
Due to the large volume of credit card applications the quickest way to underwrite the applicant is to use a scoring model. Scoring models, or scorecards, are tools used to predict the behavior of new applicants based on the performance of previous applicants. They rank order applicants or customers by risk based upon the information consumers supply in credit applications and credit bureau reports on payment history. The points for each scorable component are added, producing a score which rank orders the applicants along a risk ladder (the score scale). Although some institutions develop their own scoring models, most are built by outside vendors. The data used to develop either a proprietary or vendor-developed scorecard can come from a number od sources: the industry’s previous good accounts, bad accounts, and rejected applicants; pooled data (purchased data whose characteristics closely resemble applicants which the bank desires); and expert intelligence (the logic and evaluation processes used by successful loan officers); data generated by the dozens of securitized credit card receivables.
The issuance by banks, corporations and retailers of credit cards is very lucrative to these institutions regardless of credit charge-offs. Not only do they earn interest income on purchases / advances they also earn fees. Late payments fees have increased substantially in the United States, to over $30 per instance, on average, since 2002. Late fees in excess of $35 is also charged by several financial institutions. In years like 2003 and 2004 where the cost of funds was low and charge-offs declined, the average pre-tax return on credit card assets / portfolio was as high as 4.4% (2003) and 4.5% (2004).
The credit card industry has an established practice called reaging (also known as curing and rollback). Reaging involves changing the delinquency status of an account. The term applies to both forward and backward changes, and often occurs in both the customer service and collection areas. For example, a payment on an account subsequently returned for non-sufficient funds could result in reaging into a more severe delinquency status, whereas a delinquent account could be brought current if certain payment requirements are met (usually after receiving three consecutive minimum monthly payments.).
Banks and investors also acquire credit card portfolios for many reasons. They may want to quickly expand an already established credit card business, realize improved economies of scale, diversify product lines/niches and geographic markets, and increase profits. A seller, on the other hand, may wish to reinvest in other investments, recapitalize its business, or increase liquidity. Whatever the reason, there are markets for credit card portfolios and the portfolios sell at a premium or discount depending on the card product line(s) and/or prevailing market conditions.
The largest manufacturers of point of sale (POS) terminals include Ingenico, VeriFone, Hypercom, Cybernet, Gemalto, Panasonic.
The most recent developments in the sector has been the introduction of web-based credit card operations where there is not identifying name or account number on the card and it is utilized just by the entry on a PIN at the point of transaction.
ATM cards came after credit cards and what they really represent is breaking the physical link between a depositor and a bank branch building and face-to-face interaction with a human teller (ATMs were first developed by banks, perhaps with the idea of reducing personnel; the first ATM was installed outside a London branch of Barclays Bank). However, ATM cards, which are a magnetically encoded plastic card and encoded with a personal identification number (PIN), are still primarily used to obtain paper currency, make after hour deposits and make electronic balance transfers between existing accounts with the same institution. The networks are also known as Electronic Funds Transfer (EFT) networks and include connectivity with point-of-sale terminals at retial locations. Non-financial owned ATMs are usually cash-dispensing machines only (do not accept deposits).
ATM networks have undergone quite a bit of development in the United States and the interface and interchange between them means that none is autonomous although the average consumer may still have to pay a surcharge to use a machine of another network to access their own financial institution. This international network includes banks, non-banks, non-bank processors, hardware and software developers / vendors, merchants, integrators and regulators.
ATM network operators include Cardtronics, First Data, Electronic Payment Services, Inc., Euronet. ATM networks:
Debt card usage is the fastest growing consumer purchase transaction method for low dollar amount purchases (credit cards are still used for high dollar value purchases) in the United States. In many ways the use of a debit card represents a cashless transaction as the cardholder's checking account is directly credited (money is deducted from the account) for the purchase without the need for an additional separate payment by mail. However, Debit cards tend to be issued by, and linked to, banks with which the cardholder has either a checking or savings account with. In the United States, several companies have given hourly-wage earning employees the option to have their paycheck loaded directly to a debit card (or stored value card, see next).
Debit cards are issued by a third party company usually in association with a financial institution. Thus, one's credit card can operate within a specific ATM network without incurring a transaction fee but will usually incur a fee when it is used outside of a network ATM. The "surcharge" or "convenience" fee is the fee the assessed for cash withdrawals and vary typically between $1.50 and $2.50.
As a debit card represents the direct and immediate withdrawal of funds from either a checking or savings account, it is significant if the card is lost or stolen and the PIN number is also obtained. The debit card holder's account could be reduced very quickly. If a debit card is lost or stolen it must be reported within 48 hours in order to have the liability limited to $50. If it is reported lost or stolen after 48 hours up until 60 days, then the card holder is liable up to $500 in outstanding purchases / usage. A report of a loss or stolen card after 60 days means that the card holder will have an unlimited liability (i.e. loss of funds).
There tends to be some confusion when one utilizes a "branded" (MasterCard or VISA) debit card in a debit transaction. When one swipes the debit card through the card reader one is usually prompted: "debit or credit?" What this is really referring to is how one would prefer the transaction be processed. Regardless of the selection, the purchase amount will still be be deducted from the card holder's checking account. If one were to select "Credit", then the transaction is processed through the MasterCard or VISANet network. If one selects "Debit" then the transaction is processed through an ATM network that requires the card holder to enter a Personal Identification Number (PIN).
One of the major debit networks in the United States is Allpoint, which is available in all 50 states (with the greatest concentrations of ATMs in California, New York and Texas). The selling point of Allpoint is that their transactions are "surcharge-free." The company works with Cardtronics (the nation's largest non-bank owner/operator of ATMs), Fiserv and partners with credit unions and retailers.
In November 2004, Discover purchased Pulse ETF, an electronic debit card / ATM network that had been owned by a group of banks.
First Data Copropration owns and operates the STAR debit network, which also one of the largest debit networks.
Other debit networks include Pulse (Discover financial Services), NYCE, MAC, Tyme, SHAZAM, Presto, VISA Interlink / Debit Processing Service, MasterCard Maestro and many other regional networks in the United States and overseas.
Stored value cards (Prepaid cards) function like debit cards, however they come with a pre-determined amount of value already stored on the card, and may or may not be linked to a bank account and some may also only have a specific function, for instance like a telephone card or a metropolitan transportation card. In this example, the value on the card can be increased by inserting the card in a specialized card reader and then inserting cash or a credit card to encode the stored value card with additional monetary value.
Some tax preparation services have started offering tax refunds loaded onto a stored value card.
These types of cards can also be given as gifts. In this case the cards are utilized until the funds are exhausted. This is a growing product segment for American Express, VISA USA and MasterCard International. The cards can be used where ever the regular credit cards by each respective entity is also accepted. Some stored value cards are designated to work only with a single merchant or group of merchants, for instance bookstore, music retailer, coffe shop, gasoline station, electronics retailers, etc. There is usually an additional upfront fee for issuing the card, although some do not charge this fee, and also an "inactive / dormancy / servicing fee" if the card is not immediately used, which adds to the profits the issuers earn from this product sector. However, the fees add up and reduce that actual purchase value of the card once it is utilized by the card holder.
One of the most successful issuers is Blackhawk Network, a subsidiary of Safeway Inc., which has developed into one of the largest providers of third-party prepaid cards. The company started small in its own grocery stores by placing gift cards near its checkout aisles. As the business grew, the number of retail card brand offerings increased (American Express, Barnes & Noble, Chili’s Grill and Bar, iTunes Music Store, MLB.com, MasterCard, NBA.com, Nordstrom, Sears, Starbucks Coffee, The Home Depot, Visa). Correspondingly, the company provided shelf space within its stores and then also developed a free-standing kiosk distribution center (Gift Card Mall), which it has also provided to other retail outlets who decide to partner with Blackhawk (Food Lion, Stater Brothers, WaWa, Ahold, CVS Pharmacy, Giant Eagle, Ukrop's and Chevron). The company public indicates that it offers its kiosk in "over 80,000 locations in the U.S. and Canada", and is expanding into reloadable debit cards and prepaid cellular phone or long-distance cards.
In November 2007, VISA commenced operations of a service that will allow consumers to personalize a gift card with either a photo submitted by the consumer, a stock photo available on the company's website or would engrave a personal message on the gift card. VISA charges for the design of the card, which can be loaded with a specified amount, and then also earns the standard transaction fee every time the card is used for a purchase.
Many stored value cards are also issued with a routing number, thus the Issuer / Administrator of the card services, which does not necessarily need to be a bank, can accept a direct electronic transfer of wages, payments, cash or paper checks and the monetary value of the card can be increased correspondingly. Thus, employees that do not have checking accounts can receive their wages in the form of a stored value card and avoid the necessity of having to use a check cashing office. These cards can be utilized by parents to give "money" to young children for the child's daily purchases, or even given by parents to college-age children who are away from home residing on campus. The cards become long-term options of disbursing funds as the monetary value of the card can be increased by a direct electronic transfer of funds and can be used where debit cards are accepted and will also work in regular bank ATMs. The issuers of stored value cards earn an upfront fee for first encoding the monetary value of the card (initiation fee) and may also earn a fee on each transaction.
Stored value cards utilized as "payroll" cards" have become very popular with employers due to the substantially lower cost of electronically charging the card / account compared to issuing a paper payroll check. The cards can also be used for monthly salary, bonuses and incentive compensation to higher level employess, again curtailing the need to issue a separate check. An account can be set up if the employee is a permanent, full-time employee so that when the next monthly check or bonus is paid the existing account is increased by the disbursed value. The employee can be given Web-based access to the account to determine the outstanding balance and account activity.
Stored value cards are in the process of being adapted by government programs that have a large base of beneficiaries that receive monthly paper-based checks by mail. The advantage to this program ("ePayements") is that payment is in a timely manner and nothing is lost or delyed in the mail.
However, the Network Branded Prepaid Card Association (NBPCA) claims on its website that its own study indicates that it "found that 93 percent of network branded gift card buyers are satisfied with their purchase."
Smartcards are similar in design to credit / debit cards, however they have the additional capacity of an embedded microprocessor that can store digital information, usually personal information about the card holder. Thus, if the card is lost it still may not be able to be utilized by someone else as a stored value card could easily be used, due to the cardholder specifc data encoded in the memory chip.
| Alternative & Developing Payment Systems |
The mobile telephone has everything going for it as an alternative payment system: it's portable, contains digital data, and that data can be transferred by either regular cellular telephone communication or by temporary W-Fi connection, which would allow person to institution payments, person to retailer payments and person to person payments (mobile P2P payments). The basis structure is that a person links their bank account to their mobile phone number and then can immediately send and receive money by text message (SMS), mobile web browser (WAP / wireless application protocol) or mobile application (downloaded to the mobile telephone). Other solutions include MMS, BREW, KJAVA and SIM-based applications. However, it is unclear as to whether mobile payments are most likely to succeed in developed nations or in developing markets where many people do not have access to regular banking services and there are few payment options. The success of such a system will also require the cooperation of credit / debit card networks, financial institutions, mobile carriers, merchants, point of sale equipment manufacturers and handset manufacturers. In addition, there are major security issues related to using the mobile payment system outside of a regulated banking infrastructure, and it also increases the theft value of an individual headset.
On-line banking is a step toward a cashless society. An individual could have an automatic electronic transfer deposit of a paycheck from an employer, arrange for electronic payment(s) to be automatically sent to payees (utilities, telephone, mortgage, credit cards, etc.) at regularly scheduled intervals, thus eliminating the need for hand-written checks, and use a debit card for low dollar amount purchases.
PayPal handles billions of dollars of on-line payments every year (the company is a subsidiary of eBay since 2002). Most of its usage is related to purchases on eBay, however it is starting to expand and be utilized in other on-line purchases. PayPal functions as a trusted intermeidiary between buyer and seller, however it provides no recourse if a bona fide sale is made, funds are paid and the purchased item is not shipped. Essentially, a buyer/seller provides PayPal with information on an existing credit card or bank account, which is verified by PayPal. The purchaser can then e-mail a payment to a seller through PayPal, the credit card account or bank account is debited for the payment and e-mail confirmation is sent to both parties in the transaction. The seller may leave the funds in the PayPal account or transfer it to a bank account or receive a check. It is ideal as it allows parties to transfer payments without transferring private account numbers or having to enroll as a merchant with one of the major credit card companies.
MasterCard has teamed with PayPal to develop a “virtual debit” application for online payments.
In the third quarter 2008, it was announced that eBay would purchase on-line credit payment system Bill Me Later.
A web-based competitor, AlertPay (Montreal, Canada), also provides credit card payments to online sellers (including cross-border payments), and one can also deposit money into an AlertPay account directly from a bank. An additional competitor is RevolutionMoney Exchange, which also offers a web-based payment system (which was recently purchased by American Express).
While cash is still in use it is consistently and continually being replaced by non-paper currency transactions. However, credit and debit cards are easily lost or stolen. Thus, the next step is to even replace these cards with a new medium as it is not the card itself that is important but rather the data that it contains. The next step then is to determine just what the new medium could be. As it must be portable and unique, perhaps it is either a chip implant within the individual or biometric purchase systems that can scan a distinct portion of the human anatomy (finger print, palm print, retina, etc.)
The greatest threat to digital payments and on-line transactions is identity theft. In the United States, the Identity Theft Bill, H.R. 1731, was signed into law in July, 2004, and mandates stiff penalties for anyone commiting a crime using a stolen identity.
